China To Spend More Money, Why And On What?

Chinese leaders vowed on Thursday to implement “necessary fiscal spending” to meet the country’s 2023 economic growth target of approximately 5%, signalling the potential for fresh stimulus measures. This announcement followed a Politburo meeting, where officials acknowledged new challenges facing the economy and called for urgent actions to address them. The meeting highlighted concerns over China’s slowing growth, weak consumer confidence, and a sharp downturn in the real estate market.

Economic Challenges Prompt Call for Stimulus

China’s economy, the world’s second largest, is grappling with deflationary pressures and declining consumer demand, exacerbated by a real estate slump and global trade tensions. Recent economic data has consistently fallen short of forecasts, raising doubts about whether the country can achieve its growth target.

The Politburo’s emphasis on deploying fiscal measures reflects growing anxiety about the country’s reliance on exports and structural economic issues. State media cited “new situations and problems” that require urgent solutions to restore growth momentum.

New Measures to Boost Growth

In response to the economic slowdown, China’s central bank announced aggressive monetary easing earlier this week, including cuts to interest rates and a 1 trillion yuan ($140 billion) liquidity injection into the financial system. In addition, Beijing is reportedly considering injecting up to 1 trillion yuan into state banks to further support the economy, particularly through the issuance of special sovereign bonds.

The Politburo’s guidance also prioritised stabilising the real estate market. Officials vowed to adjust home purchase policies, lower mortgage rates, and improve fiscal and financial policies to address the sector’s challenges. This announcement led to a surge in Chinese real estate stocks, which jumped over 8%, while Hong Kong real estate shares rose by 9%.

Strategic Shift in Economic Policy

Economists hailed the Politburo’s pledge for additional stimulus as a “strategic shift” in China’s macroeconomic policy. Bruce Pang, chief economist for China at Jones Lang LaSalle, stated that the new measures represent a coordinated effort to restore business confidence and stimulate economic activities.

The government plans to utilise ultra-long special sovereign bonds and local government bonds to bolster public investment. The Politburo also pledged to support household consumption, particularly for low- and middle-income groups, and to improve childbirth support policies.

Fiscal Stimulus Needed to Drive Demand

While China has implemented interest rate cuts, analysts argue that fiscal measures are crucial to boosting domestic demand. Julian Evans-Pritchard, an analyst at Capital Economics, emphasised that “falling inflation and private sector deleveraging” mean that rate cuts alone will not be enough to drive significant demand growth. The Politburo’s communique hinted at more substantial fiscal support in the pipeline, but specifics were not disclosed.

China’s leaders also reiterated their commitment to introducing a law to support the private sector, though no details or timeline were provided for this legislation.

(With inputs from Reuters)